3

The Economist contemplates three advantages that could result from getting rid of cash in favor of electronic payments only ("with credit cards, mobile phones, and even watches"). It also mentions loss of privacy as a disadvantage.

According to this one possible advantage is as follows:

Getting rid of cash could boost the economy. Below-zero interest rates could encourage investment and might help to support the recovery. But when physical cash is around, negative interest rates are impossible: savers simply withdraw their savings. Get rid of physical money and the problem goes away, no one can avoid negative rates.

Are there any serious studies (e.g. books) that discuss possible effects of below-zero interest rates in more details? E.g., how would this tool differ from inflation, which currently seems to serve a similar purpose (and has similar effects in that is makes cash savings diminish in value)?

UPDATE I've meanwhile found some sources (still interested in more recommendations) here. There is also a fun proposal (thought experiment) for implementing negative interest rates even on physical money :)

It has been proposed that a negative interest rate can in principle be levied on existing paper currency via a serial number lottery: choosing a random number 0 to 9 and declaring that bills whose serial number end in that digit are worthless would yield a negative 10% interest rate, for instance (choosing the last two digits would allow a negative 1% interest rate, and so forth).

The new source also indicates that negative interest rates and (mild) inflation are indeed similar, but the second is (or was) simpler for governments to achieve (said John Maynard Keynes, no less): so simplicity of implementation is perhaps a part of the answer to my question.

  • 1
    Seems to be a great advantage for politicians, who can far more easily control other people's money. Doesn't seem to be much advantage for the people who earnt it. – user1450877 Sep 23 '14 at 9:13
  • @user1450877 But how do below-zero interest rates differ from inflation (also) in that regard? – Drux Sep 23 '14 at 9:15
  • I don't really understand the question. Negative interest rates would decrease the money supply, which would generally lead to deflation. Inflation is the effect an increased money supply has on prices. – user1450877 Sep 23 '14 at 9:19
  • 1
    @user1450877 well look at it from the point of view of a saver: seems to me that if you have 100K in the bank and the interest rate is -10% (with inflation at 0%) it will diminish to 90K. If there is 10% inflation (with interest rates near to 0%) instead it will also diminish in effect to 90K. But anyway, if there is a source that makes it credible to me that negative interest rates would lead to deflation (not an equivalent of inflation) this could be a good answer to the question. – Drux Sep 23 '14 at 9:30
  • The term for that is "Money supply side deflation". I'm not so sure about the premise that people would just take everything out in cash - the ECB currently has negative interest rates so in the next few months it should become apparent whether that is true (Yes it's only banks that are directly affected but if they ease lending restrictions, invest on their own or whatever that would count too IMO) – user45891 Sep 23 '14 at 19:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.